Current Account Fluctuations Research Articles

A panel VAR analysis of macro-financial imbalances in the EU

We investigate the interactions across current account misalignments, real effective exchange rate misalignments and financial gaps within EU countries, applying a Bayesian panel Vector Autoregression to 27 EU members over the period 1994–2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the real effective exchange rate misalignments is the largest. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the real effective exchange rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, increase in the rate or an expansion of the financial gap may help rebalancing the current account. In the central eastern european members, an increase in the real effective exchange rate misalignments may bring larger current account deficits in the medium-long run. Different policies should be applied to different countries in order to reach a balanced current account and to move close to the equilibrium level of the real effective exchange rate, given real and financial fluctuations. The different directions of transmissions are crucial for defining the right path towards equilibrium and they should be taken into account.

Credit Cycles, Fiscal Policy, and Global Imbalances

We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit.

THE IMPACT OF EXTERNAL PUBLIC DEBT ON THE NATIONAL ECONOMY’S KEY MACROECONOMIC INDICATORS (CASE OF UKRAINE)

The paper empirically explores the impact of external public debt in Ukraine on key macroeconomic indicators such as real GDP growth, real effective exchange rate, and current account balance. The problem of increasing external debt affects not only the problems of balance of payments fluctuations but also economic security and economic growth. We have tested the hypotheses regarding the impact of Ukraine’s external public debt on these indicators in the short and long run. As an empirical tool for hypotheses testing vector autoregression models (VaR models) have been chosen. The results of constructed models show the acceleration of the external public debt growth provokes the GDP growth rate to fall with subsequent macrostabilization. The reaction of the GDP growth rate to the shock of the real effective exchange rate is more noticeable. The shock of real effective exchange rate has led to increase in external public debt with a further dampening to zero.Empirical data from the VaR model confirm that external debt has a negative impact on GDP and essentially behaves similarly to the shock of REER strengthening. Research results confirm the relationship between external public debt, real effective exchange rate, and GDP growth in Ukraine. Based on the models it was analyzed the external public debt and real effective exchange rate shocks influence the real gross domestic product growth rate. The growth of external public debt leads to the GDP growth rate fall by 1% during a year and a half with subsequent stabilization in the future. GDP growth fluctuations are explained mainly by their own fluctuations while external public debt is accounting for 2,5—8% of its fluctuations. Fluctuations in external public debt of 7—10% are explained by current account fluctuations in Ukraine. The described results of the model correspond to the concept of dependent economy.

FLUKTUASI CURRENT ACCOUNT DAN PORTFOLIO INVESTMENT TERHADAP CADANGAN DEVISA INDONESIA

Foreign exchange reserves are the central bank's assets as a source of financing funds for international trade transactions in the global market. This research aims to analyze the current account fluctuations and portfolio investment against Indonesia's foreign exchange reserves. By using the time series 1981-2018 data sourced from the World Bank, the research results based on the method Vector Error Correction Model (VECM) indicates that the current account and the foreign exchange reserves have a two-way causality relationship and portfolio investment has a two-way causality relationship at Lag 3. The short-term estimate shows that the current account has a significant positive effect while the portfolio of investments affects negatively and significantly against the foreign exchange reserves. Long-term estimation of current account and portfolio investment is a positive and significant effect on foreign exchange reserves. Variance decomposition on short-term, intermediate and long-length contributions to the first largest foreign exchange reserves described by the foreign exchange reserves variable itself. The government should maintain the position of balance of transactions running on a surplus condition to support the increase in the number of foreign exchange reserves from time to time to encourage the acceleration of increasing the number of foreign exchange reserves cause in the short, medium and long-term first contribution to the variable foreign exchange reserves are on the foreign exchange reserves. Keywords : current account, exchange rate, GDP per capita, portfolio investment, reserves

Causes of Current Account Fluctuations in West African Monetary Union

This study analyzes the sources of current account fluctuations in the West African Monetary Union (WAEMU) economies over the period from 1980 to 2017. It is part of the inter-temporal approach which considers that the dynamics of the current account of a country is influenced by global shocks and transient or permanent domestic shocks. Thus, we developed a three-variable structural autoregressive vector model. This is the international real interest rate that represents the aggregate shock, the ratio of current account to gross domestic product which is the proxy for transient domestic shocks, and the ratio of net output to gross domestic product to measure impact of permanent shocks to the current account. From the theoretical model, structural shocks are identified by applying the long-term restrictions imposed by the inter-temporal approach in the analysis of current account dynamics. The study leads to three major results: 1) current account fluctuations within WAEMU are explained by transient domestic shocks, 2) net product fluctuations are due to permanent domestic shocks, 3) Global or exogenous shocks have a modest contribution to current account fluctuations, but their effects on net income are still significant, especially in the long run.

Sources of current account fluctuations in Taiwan: 1989–2015

In this paper, we use a small open economy model with nontradable goods and time-varying interest rates to investigate the sources of fluctuations in Taiwan’s current account. The correlation coefficient between the implied path of the current account generated from our model and the actual current account data exceeds 0.9, while tests of the cross-equation restrictions also support the model-implied present value relationship between the current account and other macroeconomic variables. We find the consumption smoothing channel, based on the discounted sum of the expected future net output growth, is the main channel for current account adjustment in Taiwan. Expected changes in the real effective exchange rate also account for much of the variation in the current account.

Current Account Balance and External Shocks in Nigeria

As a small open economy, Nigeria is highly vulnerable to adverse effect of external shocks since independence. These shocks manifest in form of oil price shocks, exchange rate volatility, global financial crisis and terms of trade shocks. This paper however investigated the impact of external shocks to oil price, exchange rate and terms of trade on the fluctuations in current account balance being an important macroeconomic variable. Multivariate Vector error correction model (VECM) was employed on quarterly data of current account, terms of trade, exchange rate and oil price. Data on current account, terms of trade and exchange rate were drawn from world development indicator and oil price was sourced from the OPEC database. The result of the impulse response function showed a negative and significant impact of external shocks on the current account fluctuations in Nigeria in the long run. The data analysis confirmed that a positive shock to the variables produce a positive response of the current account which improves it while a negative shocks deteriorates current account. The variance decomposition results showed that a significant portion of fluctuations in current account can be explained by the terms of trade shocks. The results also showed that a shock to the oil price produces term of trade shock. However, the study suggests a robust and forward-looking policy to cushion the adverse effect of external shocks in Nigeria. Also, there is need for the country to diversify her export base to reduce total reliance on oil export.

CURRENT ACCOUNT DYNAMICS AND THE REAL EXCHANGE RATE: DISENTANGLING THE EVIDENCE

We study the main shocks driving current account (CA) fluctuations for the G6 economies, using a standard two-good intertemporal model. We build a structural vector autoregression model including the world real interest rate, net output (NO), the real exchange rate, and the CA and identify four structural shocks. Our results suggest four main conclusions: (i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of CA fluctuations; (ii) temporary domestic shocks account for a large proportion of CA fluctuations, albeit smaller than in previous studies; (iii) our results alleviate the puzzle in the literature that a shock that explains little about NO changes can explain a large proportion of CA changes; (iv) the nature of the shock matters to shape the relationship between the CA and the real exchange rate.

THE CURRENT ACCOUNT AND OIL PRICE FLUCTUATIONS NEXUS IN NIGERIA

THE CURRENT ACCOUNT AND OIL PRICE FLUCTUATIONS NEXUS IN NIGERIA

Asset Prices, Real Exchange Rate and Current Account Fluctuations: Some Structural VAR Evidence for Thailand

This paper is motivated by the controversial issue in the literature pertaining to the impact of real exchange rate, housing prices and stock prices on current account fluctuations. Thailand’s quarterly data are used to examine the impacts of shocks to asset prices and real exchange rate on the current imbalances. The paper employs a structural VAR methodology with short-run restrictions. The estimates of structural VAR models are able to identify interactions among asset prices, real exchange rate, and the current account. The estimated results from two different structural models show that the responses of current account to shocks are different. It can be concluded that shocks to real exchange rate affect current account and that shocks to real housing prices can better explain current account fluctuations than shocks to real stock prices. Based upon the results from this study, policymakers should take into account the importance of shocks to real exchange rate and real housing prices that can affect the current account of the country.

On the link between current account and oil price fluctuations in diversified economies: The case of Canada

This study revisits the important relationship between oil prices and current account for an oil-exporting-country with a diversified economy, namely Canada, by paying particular attention to the time-varying nature of this link. To this end, we rely on an innovative method, the time-varying parameter vector autoregressive (TVP-VAR) model with sign restriction. We find that while an oil supply shock has a non-significant impact on the current account, an oil demand shock has a positive and significant effect, which tends to increase over time. In addition, by studying the economic factors underlying the evolution of this relation, we show that the propensity to spend oil revenues on imports has a significant negative influence on the pass-through of oil demand shocks on current account. However, a deepening of the domestic financial market and an accumulation of foreign exchange reserves have a significant positive effect on this relationship.

Current Account Dynamics and the Real Exchange Rate: Disentangling the Evidence

We study the main shocks driving current account fluctuations for the G6 economies. Our theoretical framework features a standard two-goods inter-temporal model, which is specifically designed to uncover the role of permanent and temporary output shocks and the relation between the real exchange rate and the current account. We build a SVAR model including the world real interest rate, net output, the real exchange rate, and the current account and identify four structural shocks. Our results suggest four main conclusions: i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of current account fluctuations; ii) temporary domestic shocks account for a large proportion of current account fluctuations, but the excess response of the current account is less pronounced than in previous studies; iii) our results alleviate the previous puzzle in the literature that a shock that explains little about net output changes can explain a large proportion of current account changes; iv) the nature of the shock matters to shape the relationship between the current account and the real exchange rate, which explains why is it difficult to understand the role of the real exchange rate for current account fluctuations.

Sources of Current Account Fluctuations in Taiwan: 1989-2015

Sources of Current Account Fluctuations in Taiwan: 1989-2015

A Panel VAR Analysis of Macro-Financial Imbalances in the EU

We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.

Asset Prices, Real Exchange Rate and Current Account Fluctuations: Some Structural VAR Evidence for Thailand

This paper employs quarterly data during 2008Q1 and 2016Q2 to examine the impacts of shocks to asset prices and real exchange rate on the current balance in Thailand. The structural VAR model is used. The results show that the shocks to real effective exchange rate and housing prices can better explain fluctuations in the current account.

Understanding the Sources of High Current Account Fluctuations in 5 Developed Economies

Abstract. The global economy has, in recent times, continued to face large and unprecedented external imbalances. Despite reductions recorded in aggregate current account (saving less investment) to global output ratio, the imbalances still remain. The main contributors to the imbalances have been the world’s developed economies. These developed economies have experienced fluctuating current account balances over the years and the fluctuation has contributed to a slow correction of the imbalances. This paper identifies 5 developed economies with the highest fluctuations in current account balances and analyses the sources of these fluctuations. The countries are Singapore, Latvia, Iceland, Norway and Estonia. Results obtained suggest that 1) temporary shocks account for most current account fluctuations, and the excess response to temporary shocks is as stable and pronounced as in previous studies; 2) permanent shocks drive current account fluctuations in Iceland and Latvia but not in Norway, Estonia, and Singapore; 3) Singapore demonstrates the most support for the two-good intertemporal model, since external supply and demand shocks account for its current account fluctuations. Keywords. Current account fluctuations, two-good inter-temporal model, VAR and impulse response, V5 Economies. JEL. F32, F41, F21, C22.

The European Monetary Union and Imbalances: Is it an Anticipation Story ?

This paper investigates the sources of current account imbalances accumulated within the European Monetary Union before the Great Recession. First, it documents that starting in 1996, before the actual introduction of the euro, countries in the euro area periphery experienced increasing current account deficits, appreciating real exchange rates and output growing faster than trends. Then, it develops and estimates a small open economy DSGE model which encompasses a variety of possible unanticipated and anticipated shocks. The main finding is that anticipated reductions in international borrowing costs can explain the observed evidence while productivity increases (anticipated or not) cannot: falling borrowing costs implies appreciation while increasing productivity implies depreciation. Quantitatively, anticipated shocks account for one third of output, half of real exchange rate and two third of current account fluctuations. In particular, anticipated fluctuations in international borrowing costs explain respectively 30 and 40 percent of current account and real exchange rate movements.

Determinants of cyclicality in the current account balance

PurposeThe purpose of this paper is to study the role of public and private imbalances in the cyclicality of the current account balance in a sample of advanced and developing countries. Within developing countries, the evidence does not establish the dependency of private investment on private savings and private consumption is the main driver of the saving/investment balance. In contrast, private savings seem to be better mobilized to finance private investment and the latter is the main driver of the saving/investment balance in advanced countries. Deterioration in the current account balance in response to higher private consumption could be detrimental to growth and external stability. In contrast, an investment strategy that promotes growth is likely to attract financial flows and reduce the risk of a widening current account deficit on external stability.Design/methodology/approachThe paper studies determinants of the current account deficit. It studies current account fluctuations in the short‐run and explains these fluctuations by analyzing movements in the underlying components: public and private savings as well as investments and resulting imbalances. Of particular interest is the interaction between the government budget deficit, the private saving/investment balance, and the current account balance.FindingsUsing time‐series estimates, co‐movements indicate that fluctuations in the current account balance in many advanced countries appear to be driven by private investment that determines cyclicality in imports. In contrast, cyclicality in the current account appears to be driven by private consumption that determines fluctuations in imports in many developing countries. In general, fluctuations in the government budget deficit are mostly driven by government investment and fluctuations in the private saving/investment balance are mostly driven by fluctuations in private investment. Further, fluctuations in the current account balance appear to be mostly driven by fluctuations in the private saving/investment balance.Originality/valueThe paper explains the dynamics of the current account in relation to developments in public and private imbalances and its underlying components. It shows the effects of changes in the budget deficit and its underlying components on cyclicality in the current account. Similarly, cyclicality in the current account balance with cyclical movements in private savings and investment is studied, along with which factors affect the components of the current account balance. In particular, the paper establishes which components of the current account significantly respond to the cyclical changes in macroeconomic variables.

Fiscal stance, the current account and the real exchange rate: Some empirical estimates from a time-varying framework

Abstract This paper examines the time-varying time series processes of the interaction between government fiscal deficits, the current account balance and the real exchange rate for the U.K. and U.S. economies. This is achieved in a novel way by estimating a time-varying vector autoregression model that allows for time variation in the stochastic variance and autoregressive parameters. This paper finds that, contrary to results reported in the recent literature, government deficit shocks worsen the U.S. current account balance. In contrast, results based on the historical time series for the U.K. show evidence of fiscal deficits having actually improved the current account balance. However, in commonality, the time-varying estimates show that the impact of fiscal deficits on the U.K. and U.S. current account balance has fallen in magnitude over the past 20 years. The time-varying variance decomposition results illustrate that fiscal deficit shocks played a key role in driving U.K. current account and real exchange rate fluctuations throughout the 1980s. In contrast, fiscal deficit shocks have been a small factor in the variation of U.S. current account and exchange rate fluctuations over the past 25 years. The time-varying results in this paper do not support the view that future fiscal deficit reductions alone can eliminate U.K. and U.S. current account imbalances.

The role of monetary shocks and real shocks on the current account, the terms of trade and the real exchange rate dynamics: a SVAR analysis

The article is an empirical investigation of the role of monetary shocks and real shocks on the current account, the terms of trade and the real exchange rate dynamics. Three new open economy macro-economics (NOEM) models are studied to motivate the empirical investigation. Then I apply the Blanchard–Quah decomposition to identify a SVAR model. The empirical evidence supports the NOEM model with the simplified household preference specification and with the small degree of pricing-to-market. The evidence also illustrates monetary shocks important for the real exchange rate and the terms of trade movements, but not for the current account fluctuations.